ACAPM Insights - LIBOR

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Regulators across the world looking for new strategies to strengthen the Financial Benchmark regime is evidently clear by now. The Financial Stability Board (FSB) driven multi-rate approach, which relies on (i) Strengthening the existing benchmarks by underpinning them on transaction data and (ii) Developing alternative, nearly risk-free reference rates, seems to be the direction where the reforms are headed. 

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Funding Transactions based computation methodology and centralised determination of rates seem to be the two main themes running in the LIBOR Roadmap released recently by the ICE Benchmark Administration (IBA). While the former is derived on the need for benchmarks to be based on actual transaction data.

 

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ICE Benchmark Administration (IBA) published LIBOR Roadmap following extensive consultation with various key stakeholders for the $350 trillion benchmark. Keeping up with the strategic direction set by Financial Stability Board (FSB), the focus of the administrator has been to base LIBOR in transactions to the greatest extent possible.

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The ICE Benchmark Administration in the Feedback Statement on the Evolution of ICE LIBOR (published in Dec 2015) provided insights into the proposed changes and industry responses on the subject of LIBOR submission and determination methodology.  The crux being, shift in focus towards transaction based rate determination methodology.

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Amongst all the benchmark rates operating in the financial system, LIBOR could arguably be the most important and widely used benchmark referenced by transactions totalling $350 trillion. Administered by IBA (ICE Benchmark Administration) for seven tenors across five currencies, LIBOR is determined based on the submissions made by the panel banks.

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